EFSA Issues Regulations for Covered

The Egyptian Financial Supervisory Authority (“EFSA”) promulgated a new decision on the rule for issuing covered bonds (the "Decision"), namely the bonds that could be issued by joint-stock companies, guaranteed by an independent portfolio of their long-term financial rights (as previously mentioned in the February Issue of ELU).[1] The purpose of regulating covered bonds is to enable joint-stock companies wishing to issue bonds to allocate an independent portfolio of its own long-term financial right, in order to guarantee such bonds, and hence grant the bonds a higher level of creditworthiness. In the end, this is expected to constitute an incentive to investors.

Rules for Issuing Covered Bonds

• To the exclusion of securitization companies, joint-stock companies can issue covered bonds, on the condition of obtaining the needed EFSA license thereto. The companies having the right to issue such bonds are only those which practice activities of money transfer, installment sale, or other activities that provide a source of regular long-term financial rights.

• The prospectus for subscription in covered bonds shall include a clear disclosure on the order of preferences of the rights of bond-holders in relation to other creditors of the company.

• Covered bonds shall be guaranteed by a portfolio of long-term financial rights, or other guarantees, such as registered real estate assets, or real estate allotted by an official decree, or movable assets that cannot be registered, including securities registered at the stock exchange and government securities.

• Issuing companies must have published financial statements for a minimum of one year.

• Concerning the portfolio of guaranteeing financial rights, it must not be less than EGP 20 million. The amount must be undisputed.

• With respect to credit-rating, the credit-rating of the issuance, including the financial rights portfolio and other additional guarantees, shall not be less than the investment level. The credit-rating shall be renewed in the end of each financial year, during the entire period of the covered bonds.

• The issuing company is bound to either keep the value of both the guaranteeing portfolio and other guarantees at a minimum of 12% of the total value of the issuance, or present additional guarantees in case it is lower than 12%.

• The definitive transfer of the independent financial rights portfolio in favor of bond-holders shall take place once the bond-subscription has been covered.

• Finally, the Decision mentioned in detail the documents and data that must be attached with the application for issuing covered bonds, as well as other applicable procedures. It also clarified the role of the custodian regarding the custody of the documents of the portfolio and other agreements related to the issuance.

Conclusion

This Decision constitutes an important addition to the Egyptian financial market, as it enables companies that have regular cash-flow to borrow from the market, at reasonable rates, due to the good creditworthiness of the bonds they issue. Indeed, enhancement of financial instruments is a crucial need for the Egyptian economy in the meantime. [1] EFSA Board of Directors' Decision No. 22/2016 on the Issuance of Covered Bonds, Egyptian Gazette, Issue No. 80, 5 April 2016.